By Naked CIO, 11 August 2008 16:52
COMMENT
Sound infrastructure projects often fail to win board backing because of flaky ROI demands. But come up with a hare-brained scheme and boards fall over themselves, says the Naked CIO.
Over the past week I have been consulting various interest groups about the capital budget for 2009. These discussions mark the beginning of what I affectionately call the silly season.
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The season always follows the same pattern: we have to decide the best way of spending money to drive the organisation forward but get no useful input or understanding from the board.
My CEO reacted to certain architecture expenditures I put forward as if I were asking for elaborate light fittings. His perspective was, if the existing lamps give off light then why spend money on new fixtures? What we were actually discussing was upgrading an email system.
I have been told all capital requests must provide a minimum of 15 per cent ROI. Yet the company has no established measurement of ROI post project.
While we try to create these measures, any assertions on ROI remain pure speculation and completely unattainable in conventional terms for many aspects of IT.
As part of the budget exercise, I went back over some return-based assumptions made the previous year. In one case I found a software development that delivered 10 per cent of its projected sales revenue.
Yet no one remembers this. To many in the organisation the development is seen as a resounding success. This pattern represents the rule rather than the exception.
The only possible conclusion is my company doesn't care about real ROI but just wants to be able to justify the initial capital outlay.
In all my time managing capital budgets I am always astounded at the arbitrary way funds are allocated and by the ridiculous justification for some of the spend.
Speculative, IT resource-hungry schemes with little chance of realising their potential are almost always chosen over foundation technology projects that seek to make networks and systems more reliable, resilient and functional.
As part of my preparations I examined last year's customer satisfaction survey. Critical comments from employees overwhelmingly centred on reliability and performance of existing systems. That response is entirely consistent with my approach: I advocate innovation but only so long as it forms part of sound development and IT strategy.
So I find it hard to rationalise why speculative, risky and often unrealistic projects should take precedence over environment projects that service current needs. You fix leaks in the roof and holes in the wall before building the extension.
Nevertheless, infrastructure projects represent wasted spending in the eyes of a boardroom where most do not understand the impact of this type of initiative.
Board members are often sold on unrealistic - in some cases even irresponsible - projects that hold out tantalising dreams of making money. Yet these projects almost always end up losing the organisation much more than it gains.
So tell me this: how do I stimulate innovation yet convince our board that spending on critical services and infrastructure is as essential to growth and customer service as speculative new ventures?
Comments
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1. anonymous
The discipline aimed at resolving this issue is portfolio management. In the context of IT, it is seeing ever increasing adoption, for instance we see it cropping up as the Service Portfolio concept in ITIL v3.
As with any management concept, there's a hundred ways to skin the cat you are talking about. In a portfolio management context, there are a number of approaches you could take e.g. ring-fencing budget for maintaining existing systems, so that you have a sensible discussion about how to reduce it by X% over Y years, rather than having to fight over whether having email is a good thing; explicitly limiting "innovative" spend to Q% of budget; giving regulation-required or business-critical systems priority over ROI exercises, etc.
2. Paul Wallis
Hope you don’t mind me repeating some of the comment I made in response to one of you previous blogs, The True Cost of IT.
Try thinking about IT as existing for one reason: to manage the flow of data between business assets.
Today, business resources and IT assets are either providers of data, consumers of data or provide the conduit through which the data can flow.
People provide and consume data daily, as do applications and systems. Hardware and cables act as conduits through which data flows: between desks, through office and corporate networks, across the internet, through deep sea cables and via satellites.
Supporting, processing and optimising the flow of data are critical to maximising business performance (see “OBASHI methodology” on Wikipedia, for more about the above).
By thinking about IT this way you can create the long sought after ‘big picture’ of the relationship between business and IT.
You can see: who ‘owns’ a flow of data; what business processes use the flow of data; and what applications, systems, hardware and infrastructure the data flows through.
By attaching value meta data to data flows and cost information to IT assets, you can start to assess the ratio between IT support costs and the value of the contribution of IT to the business. (Of course to do all the above, you will need enterprise software that incorporates the framework, and understands the relationships and dependencies between all the assets. Such software exists.)
The whole business can be modelled this way. Which means you can walk into a board meeting, unroll a simple picture of the whole or part of the organisation on the boardroom table and show how much each flow of data is worth to the business. This enables more accurate and more efficient business decisions and will enhance the reputation of IT.
It should also make it much easier to “convince [the] board that spending on critical services and infrastructure is as essential to growth and customer service as speculative new ventures”.
3. David Martin
Considering the board are a bunch of morons, and are prone to lying then give them the lies they so eagerly desire...acountancy and statistics!
to upgrade an email system, you give them the current statistics on number of emails, average size of emails, cost of running the servers (administration, power consumtion, captial costs, etc,etc), the amount of downtime and potential cost to the organisation should a server fail due to lack of redundancy (even if that isnt an issue...as they wouldnt have a clue anyway) then multiply it all out to give some figure. then give another figure (15% less) based on expected improvements based on the new architecture...its all make believe since as you said calculating real ROI, is next to impossible as it would take as long to calculate as to be in the next cycle of required upgrades!
I certainly dont advocate lying, but when the idiots at the top dont understand what they are asking and give arbitrary figures like 15% ROI, yet all youre trying to do is deliver a more reliable environment to prevent outages, provide more security and a more efficient service, why take the time to truly justify that expenditure utilising quantifiable measurements... just present the BS they are so good at...
4. anonymous
In answer to your last question; I don't think you can. Somewhere out there will be a useful management consultant (don't laugh!!) who can explain that the ROI metrics are too limited to fully enable the Board to make rational, informed decisions about the risks and costs of failure as an integral part of the business case.
Some of the "silly" suggestions today will be tomorrow's market leaders. Conversely some of the rational technology plays today will be money down the drain tomorrow. There are probably as many poor technology infrastructure investments out there as there are fantastic ROI proposals............ and a lot of scepticism to overcome
5. Simon Allen
Those that have already replied have hit most of the nails.
The first time I was asked to demonstrate a '12-month payback to 100 per cent of the value of the kit' I gave honest projections and the finance director accepted them. An hour later he changed his mind and I was never told why. That was 1983 and was a big lesson that they will do as they do.
This same company (prestigious retail) would spend thousands of pounds on special stuff and effects for the shop windows - which would be chucked in the skip at the end of three months. No '100 per cent payback' justification needed there!
Since then, I agree that they pick any reason out of the air to support their whim/little plan/favourite person and logic, supported by numbers, has nothing to do with it.
One of the greatest changes in the past 25 years has been the move away from planned maintenance and upgrades towards 'projects'. They then spend as much money on fire-fighting when the equipment fails due to lack of maintenance and upgrades ...
Even if you do no fancy project this next financial year, I hope that you can do basic maintenance of hardware and software.
6. Alex P
It's simple... You lie :)
7. anonymous
ROI projections are just lies, damn lies and statistics - they can be twisted to produce pretty much any result you want, or need.
Given some of the (supposed) cleverest people in the world in large banks round with large professional risk management departments, swallowed hook line and sinker CDO and other quasi BS-financial vehicles causeing the current ongoing global financial menltdown, a bit of extra +/- error tolerance on any projected ROI is unlikely to raise an eyebrow these days, as long as you say a benefit will be obtained.
By the time the project has come full circle to post project review, you will no doubt have moved on, or can find some lacky or recent leaver to stick the blame to if things have gone awry!
And anyway, the pie-in-the-sky projects you go on about will have crashed and burned more spectacularly providing some additional cover.